Markets appear to have reached a flash point over night with European leaders squabbling over a strategy to contain Europe’s worsening debt crisis while the International monetary Fund (IMF) stated in no uncertain terms that more must be done and it must be done now. U.S investor confidence was tested and markets roiled as the Nasdaq and S+P both lost over 2% marking their worst session in over a week. Risk currencies got hammered as Spanish yields climbed with EUR/USD reaching an intraday low of 1.2531 while AUD/USD lost over one percent to be trading just above parity.
In Spain, yields again soared suggesting it is getting more and more difficult for Spanish banks to obtain financing and are getting to the point where they are closed out of the market and require further bailout funds. As European leaders get set to meet at the latest summit it appears German Chancellor Merkel is becoming more and more isolated in her refusal to accept what most believe to be the solution to Europe’s debt crisis – jointly held bonds (Eurobonds). The result of these bonds would likely instill more confidence in taking up Spanish, Greek and Italian debt and in essence provide these governments the time required to implement austerity and get their finances in order, while promoting growth policies. European equities lost around a percent and remain fixated on the upcoming EU Summit to be held in Brussels. The news was not all bleak with French Prime Minister Jean-Marc Ayrault confident that a deal will be made noting that ”governments know what is at stake. We have to ensure Europe’s financial stability and press ahead with our efforts to bring down debt and deficits.”
Economic data suggested improvement in German retail sales with the latest figure showing a 1.4% increase and much better than the -2.4% posted the month previous. Data out of the U.S was mixed with unemployment claims dropping slightly to 387K while existing home sales and the Philly Fed manufacturing index both dived. With U.S data again failing to show any significant improvement’s it may only be a matter of time until a third round of quantitative easing is put on the table.
In Australia we have no economic data releases today – however many ski resorts did receive a welcome dumping of snow overnight. I’m off to the mountains to bury my sorrows and will be hoping that next week proves more positive!
Markets this morning are no clearer on what is required to trigger QE3 with the Fed overnight only committing to more of the same with Operation Twist set to continue through until the end of the year. Bernanke did mention that he and the Fed stand ready to take further action in addition to the extra US$270 billion on the table for Operation Twist. “If we don’t see continued improvement in Continue reading
Exchange rate’s positioned to rally on improved sentiment are doing just that today, with the Aussie dollar testing fresh one and a half month highs breaching 1.0200 against the U.S dollar – albeit briefly. AUD/USD is currently trading around 1.0180 and buying just above 80 Yen. The reason for the improved risk sentiment overnight is three fold and can be attributed to a drop in Spanish bond yields, Greece close to forming government and U.S building permits hitting their highest point since October 2008 (the month following Lehman Brothers bankruptcy).
Reports suggest that European officials are encouraged by the formation of a pro-euro government and are in discussion on how to ease some austerity in a bid to snap Greece’s 5 year decline. However not all reports suggest everyone is so keen on the idea with Merkel swiftly denying there would be any changes at all to the bailout conditions. Regardless markets have seen the positive’s and the combined efforts of the last few weeks may be a turning point. European equities had a strong night with most indices finishing almost 2% higher, while EURO crosses saw gains across the board. EUR/USD nudged 1.2700 for the second time in three nights before finding resistance.
U.S markets pushed higher still suggesting more and more investors believe stimulus is on the way and that the Fed will deliver with another round of Operation Twist. The tech heavy Nasdaq was the best performer up 1.2% with Facebook was of the biggest benefactors. The U.S dollar went backwards along with treasuries while oil gained but has is still 15% below where it was last year.
The drop in Spanish treasury yields offset poor ZEW German economic sentiment and has seen Aussie equities open over half a percent higher led by higher commodities prices. Likewise Japanese equities look set for a strong open, up 0.75%. Tonight all eyes are on the Fed while in the U.K economists are predicting that unemployment claims will drop for the second month running. Exchange rate’s will remain largely flat during trade today but expect a ramp up in activity culminating in any Fed announcement at 2.30am AEST.
In the absence of any economic data and with Greek election’s behind us, it appears markets are again turning pessimistic with Spanish 10 year bond yields climbing to a euro-area record above 7% – the point at which it is said that a bailout is required. Despite the news re: Spanish yields, European equities finished well with the DAX up 0.3% and the FTSE up around 0.22%. Exchange rate’s are today tracking in a similar vein of form to yesterday with EUR/USD just below 1.2600, having rallied as high as 1.2750. AUD/USD – the ultimate risk indicator – is holding above 1.0100 having reached a recent high of 1.0142.
The G20 summit has kicked off in Mexico with leaders committing to solving the European debt crisis through a coordinated approach involving stimulus and new policy aimed at growth. This was made clear with the statement that Europe has ”quite a significant extra set of tools which did not even exist at the beginning of this crisis,” Richard Corbett, an aide told Bloomberg Television in Brussels yesterday. However, the view of most is that Angela Merkel will continue to push austerity until a make or break moment in which there is no choice but to enact a eurobond type of solution. Merkel’s idea as I see it, is to eek out as much austerity and change in government spending as possible so that the Euro area does not reach such a point again in the future.
U.S markets finished trade positively with the Nasdaq and S+P piling on 0.8% and 0.15% respectively. Traders are betting on Federal Reserve Chairman Ben Bernanke undertaking a further round of quantitative easing (QE). This will likely be in the form of another Operation Twist – the term given to describe the Fed buying up shorter term treasury bonds and selling longer term bonds – with the aim of creating a source of cheap funding for business. The fed’s next meeting is to be held on June 20th.
Aussie markets have opened lower on the back of the increase in Spanish yields while the Aussie dollar holds on to gains made over the weekend. RBA monetary policy minutes are due for release at 11:30am and should give a good insight into the RBAs thinking re: the European debt crisis. Tonight sees the release of German economic sentiment and U.S building permits.
The pro-bailout New Democracy party has won enough seats to form a coalition government in Greece ending weeks of speculation that the anti-austerity Syriza party led by Alex Tsipras would form government and see Greece swiftly thrown out of the Eurozone. While in theory little has changed with the voting in of the New Democracy party, it does no doubt remove a layer of doubt or risk from global markets and give’s the G20 summit Continue reading
Optimism is high this morning as rumours, reports, speculation - whatever you want to call it – suggest that central bankers are discussing a coordinated approach to tackle this stubborn European debt crisis. The only certainty however was a speech this morning by Bank Of England (BOE) Governor King demonstrating that further stimulus and looser policy could be on the cards as the U.K economy continues to slow, highlighted by Continue reading
Markets are moving their attention from Spain to Greece ahead of the country’s landmark elections this weekend. With two party’s and potentially two outcomes possible, markets are in for some what of a D-Day come Monday. The two scenarios we face can be summed up simply and involve Greek voters either electing the pro-bailout New Democracy party lead by Antonis Samaras or the anti-austerity party Syriza whom market commentators suggest Continue reading
European bond yields crept higher overnight with Spanish yields hitting fresh highs of 6.83%, yet equities still soared…Markets and investors alike continue to stumble around in a somewhat dazed and confused state, playing what one market commentator called “headline roulette”. Essentially news headlines overnight consisted of Eurobond ‘chit-chat’ and Spanish bond yields with traders prefering to buy up on the Eurobond specualtion, Continue reading
Foreign exchange markets and equities have seen further volatility in overnight and morning trade following a spike in Spanish bond yields to 6.51%. While bond yields remain below the critical 7% mark which will make life even more difficult for Spanish banks it was the biggest gain in yields since January showing real investor skepticism of the bailout. Exchange rates have been knocked back to their pre-Spanish bailout levels with AUD/USD Continue reading
Markets are up this morning on news of a Spanish aid package and strong Chinese export numbers. Foreign exchange markets are today favoring risk assets with the Euro and Aussie both trading higher while equities futures soar on the positive sentiment. The AUD/USD rate gapped to above parity this morning before settling just below 1.0000, while the EUR/USD rate has today soared almost 150 points on news that Spain has sought 100 billion Continue reading